Euro rose on Tuesday against a basket of major rivals, extending gains for the fourth straight session against the dollar and surpassing $1.09 to a three-month high on hopes of shrinking the US-eurozone interest rate gap this year. 

The European Central Bank prepares to cut European interest rates for the first time since 2024, in the first step of policy easing in Europe, however such a process is expected to be slower than expected.

Inflation in Europe accelerated once more in May, in turn renewing pressures on European policymakers and hurting the odds of multiple ECB rate cuts this year. 

On the other hand, the odds of multiple Fed rate cuts in September and November improved following a spate of weak US data.

The Price 

The EUR/USD rose 0.1% to $1.0916, the highest since March 21, with a session-low at $1.0899. 

Euro rose 0.55% on Monday against the dollar, the largest profit since May 15 as US yields dipped.

European Rates 

Recent European inflation data reduced the expected rate cuts by the ECB from 75 to 50 basis points this year.

US Rates 

Recent data showed US manufacturing shrank again in May, while construction spending fell unexpectedly, indicating a slowdown in US growth.

Following the data, the odds of a September interest rate cut in September rose to 60%, and to 72% in November according to the Fedwatch tool. 

Rate Gap

The US/eurozone interest rate gap currently stands at 100 basis points, the lowest since May 2022, and is expected to expand to 125 basis points this week in favor of the US. 

The ECB 

Later on Wednesday, the ECB will hold its periodic policy meeting, widely expected to cut interest rates by 25 basis points.

ECB President Christine Lagarde will provide fresh clues on the prospects of European rate cuts and policy easing later this yeare. 

Euro Outlook

UBS’s analysts expect the euro to soften this week on profit-taking after strong gains in the past few weeks. 

However, the ECB could surprise us with a bullish stance on future policies, with a potential delay of the timing of the next rate cut, in turn underpinning the euro and sending it above $1.09. 

The US dollar lost ground against most major rivals on Monday following weak data which triggered new speculation about the future of monetary policies.

The US personal spending data released boosted the odds of Fed interest rate cuts this year. 

And earlier today, the ISM manufacturing PMI fell to 48.7 in May from 49.2 in April, digging deeper into negative growth territory. 

US 10-year treasury yields fell to May 23 lows following the data.

According to the Fedwatch tool, the markets expect the Fed to maintain interest rates in June and July, with a 51.4% chance of a September rate cut. 

On trading, the dollar index fell 0.5% as of 104:1 GMT to 20:32 GMT, with a session-high at 104.7. 

Aussie

The Australian dollar rose 0.5% against its US counterpart as of 21:24 GMT to 0.6686. 

The Loonie

The Canadian dollar fell 0.1% against the US dollar to 0.7335. 

US stock indices were mixed on Monday after marking a monthly profit in May.

Recent US inflation data last week raised speculations about the future of the Fed’s monetary policies. 

Markets heavily expect the Federal Reserve to cut interest rates at least once based on recent data. 

On trading, Dow Jones fell 0.6% as of 16:52 GMT, or 246 points to 38,440, while S&P 500 fell 0.2%, or 8 points to 5270, as NASDAQ added 0.4%, or 60 points to 16,795. 

Euro rose in European trade on Monday, maintaining gains against the dollar for the third straight session following strong European inflation data, which renewed pressures on the European Central Bank and hurt the odds of multiple rate cuts this year.

The euro has been trading in a tight range since mid-May, and could be gathering momentum before piercing the psychological barrier of $1.09. 

Now the markets are waiting for the ECB’s policy meeting in the next few days, looking for clues on the future of the eurozone’s monetary policy.

Markets also await the all important US payrolls data on Friday, crucial for gauging the likely path ahead for US interest rates. 

The Pair 

The EUR/USD pair rose 0.15% to $1.0859, with a session-low at $1.0844, after closing up 0.15% on Friday, the second profit in a row following European inflation data. 

The pair rallied 1.7% across May, the first monthly profit in 2024. 

Such monthly gains were underpinned by expectations the ECB will likely hold off raising interest rates in the second half of the year following the expected cut in June. 

European Inflation

Official data showed the eurozone consumer prices rose 2.6% y/y in May, above estimates of 2.5%, and up from 2.4% in April. 

Core prices rose 2.9% in May, up from 2.7% in April.

European Rates

Such data reduced the odds of ECB rate cuts this year from 75 basis points to just 50 basis points. 

The ECB

Later on Wednesday, the ECB will hold its periodic policy meeting, widely expected to cut interest rates by 25 basis points.

ECB President Christine Lagarde will provide fresh clues on the prospects of European rate cuts and policy easing later this yeare. 

Euro Outlook

UBS’s analysts expect the euro to soften this week on profit-taking after strong gains in the past few weeks. 

However, the ECB could surprise us with a bullish stance on future policies, with a potential delay of the timing of the next rate cut, in turn underpinning the euro and sending it above $1.09.